While Americans may complain about paying taxes, a new working paper from the National Bureau of Economic Research found that the vast majority are honest on their tax returns.

Economists Sara LaLumia of Williams College and James M. Sallee of the University of Chicago investigated whether people decide whether or not to commit tax evasion if broad benefits outweighs a tiny risk of being caught and punished.

LaLumia and Sallee compared data from before and after a 1987 change in the way tax laws required Americans to report their dependent children. The new law required more verification that the children existed — resulted in millions of previously claimed children going “missing.”

Prior to 1987, all a filer needed to do was list each dependent’s first name. In 1987 they were required to list a Social Security number as well.

“[M]any filers had been cheating before the reform,” the report stated. “Yet, the number of filers who availed themselves of this evasion opportunity is dwarfed by the number of filers who passed up substantial tax savings by not claiming extra dependents. By declining the opportunity to cheat, these taxpayers reveal information about their willingness to pay to be honest.”

According to the data published by the NBER, while it was relatively easy and low-risk to cheat, 97.5% of taxpayers resisted the temptation to lie about how many dependents live in their households.

How much are people willing to forego to be honest, to follow the rules? When people do break the rules, what can standard data sources tell us about their behavior? Standard economic models of crime typically assume that individuals are indifferent to dishonesty, so that they will cheat or lie as long as the expected pecuniary benefits exceed the expected costs of being caught and punished. We investigate this presumption by studying the response to a change in tax reporting rules that made it much more difficult for taxpayers to evade taxes by inappropriately claiming additional dependents. The policy reform induced a substantial reduction in the number of dependents claimed, which indicates that many filers had been cheating before the reform. Yet, the number of filers who availed themselves of this evasion opportunity is dwarfed by the number of filers who passed up substantial tax savings by not claiming extra dependents. By declining the opportunity to cheat, these taxpayers reveal information about their willingness to pay to be honest. We present a novel method for inferring the characteristics of taxpayers in the absence of audit data. Our analysis suggests both that this willingness to pay to be honest is large on average and that it varies significantly across the population of taxpayers.

If only 97.5% of Congress were willing to pass up easy opportunities to enact sneaky tax provisions like phase-outs and the AMT...

Posted by: AMTbuff | Jul 29, 2011 11:20:56 AM

The People are also held up to a different standard. Lie on your taxes, go to jail, have your possessions seized, wages garnished. Political class gets caught on a lie, even one that breaks the law, and they may lose their office, but they keep their pension.

The difference is the People are threatened with the force of Law and guns (police). Ruling class? Not so much...unless we, the People, break out the torches and pitchforks soon. ;)

Posted by: tbrooks | Jul 29, 2011 11:37:12 AM

I think that most people would believe that the government would have a way of finding out if a child actually existed, and they would therefore choose to avoid the risk when filing the retirn. Even if they knew the government did not perform such checks automatically, it is surely something easy to check in an audit. So I don't believe that it's honesty that is causing 97.5% to comply, some of those people are simply making judgments based on risk.

I would take a different interpretation of these results. I find it surprising that as many as 1 person in 40 would be willing to lie about the existence of a dependent despite the risk of being caught.

Posted by: sf | Jul 29, 2011 11:57:36 AM

It must also be remembered that this is from 1987, a time when the public was more willing to pay taxes because they were seen as a necessary contribution to society. Today with the US government being ever more increasingly exposed as an organized crime outfit, the willingness of the public to hand over its hard earned money to communists and criminals is surely less.

The other thing to remember is that the most effective way to avoid a tax is not to play games with deductions, but to avoid having the income that is taxed being recorded in the first place. This is why some people work for cash on the side in addition to their regular 9 to 5.

I don't believe that, at least not here in California. The state legislature has been after Amazon to change its business practices because too many people apparently don't pay their taxes on online purchases if they're not forced.